Announcements Corporate Rating Alerts

GCR affirms AECI Limited’s A+(ZA) rating on the back of a strong funding profile. Outlook Stable

Rating Action

Johannesburg, 28 April 2020 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term issuer ratings assigned to AECI Limited of A+(ZA) and A1(ZA) respectively, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
AECI Limited Long Term Issuer National A+(ZA) Stable Outlook
Short Term Issuer National A1(ZA)

Rating Rationale

The ratings reflect the group’s fiscal discipline, demonstrably robust liquidity, as well as the strong global positioning of its Mining Solutions offering in particular.

We note AECI’s sustained leading position in production and supply of mining explosives and chemicals in Africa, as well as the group’s burgeoning product market share internationally. The mining explosives business (AEL), is one of the five largest global suppliers of commercial explosives, with the group continuing to leverage internal expertise to further entrench and diversify its offering in Latin America, West Africa, and Australasia. The relatively strong geographic diversification is, however, somewhat counterbalanced by AECI’s exposure to sub-Saharan Africa (which continues to represent just over 80% of revenues), where socio-political factors could curtail mining productivity.

The group’s competitive position is also supported by integrated processes, a strong supply chain, and plant reliability, which has entrenched long-term relationships with international corporates. In view of the considerable pressure on manufacturing in South Africa, the group is expected to continue to show significant concentration to mining, which accounted for 60% of revenue and 47% of EBIT at FY19. We, however, have considered AECI’s diversification across different minerals, as well as its relatively granular customer base and debtors’ profile, which mitigate concentration somewhat. Price competitiveness and the counter-cyclicality of the group’s product mix has also sustained a relatively strong revenue baseline despite sustained weakness in group’s domestic market.

Rationalisation and streamlining of the group’s operations is expected to continue to support resilient operational performance and cash generation through the cycle. Cash generation and conversion remains relatively strong to date, with further refinement of procurement processes in certain divisions expected to bring the working capital cycle in line with internal targets after the R538m absorption in FY19. As demand and productivity would be curtailed by protracted COVID-19 related disruptions, we do not expect the group to fully realise savings from past/ongoing realignment initiatives in FY20, although this should help to stabilise margin at higher thereafter. We have noted further inroads made to bolster Schirm’s productivity, ongoing efforts to secure new contracts across the group, and further cost flexibility being built into the non-mining divisions. In our view, this is counterbalanced somewhat by the potential for slowdown in Much Asphalt and other chemical product volumes in the wake of the COVID-19 crisis, due to further constraints to national and local governments’ fiscal positions, and the recessionary environment. As such, we expect material impairments of goodwill over the rating horizon.

AECI continues to evidence a conservative funding profile, which is expected to be sustained, with further acquisitions and expansionary capex likely to be funded from cash reserves. Net debt to EBITDA registered at 1.2x, with interest coverage at 7.1x, while operating cash flow coverage of debt remained in the intermediate range, at 31%. In our view, the settlement of a sizeable maturities over the rating horizon is expected to sustain leverage metrics well within covenant limits, although we might revise this view due to protracted operational uncertainty and disruptions as the FY20 progresses.

With respect to liquidity, further comfort has been taken from cash preservation interventions adopted, including deferring settlement of the FY19 dividend (R448m), bolstering undrawn, committed facilities to c.R3bn, and deferring non-essential capex. This further enhances AECI’s liquidity, supporting the Uses vs. Sources ratio comfortably above 2.0x despite the potential for a material contraction in cash flows in FY20, and the higher debt maturities scheduled for the 24 months to April 2022. Looking further ahead, GCR’s view may be curtailed by much deeper than anticipated earnings pressure in the wake of the ongoing global crisis, or large-debt funded acquisitions undertaken in the next 18-24 months.

Outlook Statement

The Stable Outlook reflects GCR’s view that through-the-cycle earnings and cash generation will remain resilient despite the recessionary climate. Our view is further reinforced by strong liquidity and conservative leverage projected over the rating horizon.

Rating Triggers

The ratings could be lowered if material cash flow contraction is sustained beyond the COVID-19 related disruptions. Sustained and unremedied proximity to covenants could also result in negative rating action. Upward rating action could be taken if the group continues to demonstrate low leverage, earnings resilience and strong liquidity beyond the COVID-19 related constraints being experienced in the short-term.

Analytical Contacts

Primary analyst Patricia Zvarayi Deputy Sector head: Corporate Ratings
Johannesburg, ZA patricia@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
GCR Rating Scales, Symbols and Definitions, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Country Risk Scores, January 2020
GCR Corporate Sector Risk Scores, March 2020

Ratings History

AECI Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National A(ZA) Stable July 2015
Short Term Issuer Initial National A1(ZA)
Long Term Issuer Last National A+(ZA) Stable June 2019
Short term Issuer Last National A1(ZA)

RISK SCORE SUMMARY

Risk score
Operating environment 11.00
Country risk score 7.00
Sector risk score 4.00
Business profile 2.00
Competitive position 2.00
Management and governance 0.00
Financial profile 2.00
Earnings performance 0.00
Leverage and capital structure 1.00
Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Risk Score 15.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Conditions Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
Coverage The scope of the protection provided under a contract of insurance.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Offset A right (Right of Offset) to set liabilities against assets in any dispute over claims.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Reserves A portion of funds allocated for an eventuality.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit ratings have been disclosed to AECI Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

AECI Limited participated in the rating process through management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from AECI Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results for December 2019
  • Four years of comparative audited numbers
  • Industry presentation for 2019
  • Debt facility details as of December 2019 and YTD 2020


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